Factory slump offset as other indexes gain Leading indicators rise along with construction spending

BLOOMBERG NEWSTHE BALTIMORE SUN

WASHINGTON -- A key measure of U.S. manufacturing declined last month, even as other reports showed prospects for overall growth remain healthy.

The National Association of Purchasing Management (NAPM) said yesterday that its index of factory activity fell to 46.8 last month from 48.3 in October, as new orders and production declined. The sixth consecutive monthly drop put the index at its lowest level since February 1996.

Separately, though, the Commerce Department said spending on U.S. construction rose 0.3 percent in October, matching September's rise and making its fifth straight monthly increase, as commercial and residential building boomed.

And the Conference Board reported that its index of leading economic indicators rose 0.1 percent in October after being unchanged a month earlier. Six of the 10 indicators made a positive contribution to the index, designed to forecast economic performance six months from now.

"The Asian crisis that's killing export manufacturing has led to the lower interest rates," said Diane Swonk, deputy chief economist at Bank One Corp. in Chicago. And that is "fueling construction and consumer spending," keeping alive an expansion now in its eighth year.

"Worries the economy was going to fall into a big recession have largely been dismissed," said Lyle Gramley, a former Federal Reserve Board governor now a consulting economist at the Mortgage Bankers Association of America.

The NAPM report also signaled that inflation is not likely to be a problem anytime soon. Its index of prices paid fell to 35.0 last month from 35.8 during October, indicating that more companies reported price declines during the month.

The NAPM index has been below 50 since June -- a sign of a contraction in manufacturing and slower overall economic growth -- after rising for 22 consecutive months.

A reading below 50 means the number of manufacturers who said business deteriorated was greater than the number of those saying it improved.

Still, the export orders index, a gauge of Asian and other international demand, rose to 42.9 last month from 42.0 during October, the second increase in the past three months.

"Is that the beginning of an upward trend? If it is, we'll see strength returning to the manufacturing sector," said Norbert Ore, chairman of the NAPM's survey committee and director of corporate purchasing at Chesapeake Corp., a paper and packaging manufacturer in Richmond, Va.

"The data so far indicate no collapse in domestic demand," said Jerry Zukowski, an economist at PaineWebber Inc. in New York.

Components of the NAPM index also raised the possibility of faster growth in the manufacturing sector. The suppliers delivery index, a gauge of pent-up demand, rose to 50.2 in November from 50.0 during October. The inventory index fell to 44.9 in November from 49.8 during October.

The Commerce Department report on construction showed that spending on commercial projects, such as office buildings and private schools, increased 0.9 percent in October, while residential construction spending -- which accounts for about half of all spending on U.S. buildings -- rose 0.8 percent.

Construction spending in August and September was revised higher in the latest report. Because the Commerce Department used estimates of August and September construction spending its latest report on third-quarter gross domestic product, "this will raise third-quarter GDP even somewhat further," said David Resler, chief economist at Nomura Securities Inc. in New York.

Spending on government-sponsored projects fell 1.5 percent to a $147.3 billion rate. Declines in taxpayer-funded construction were seen in industrial buildings, conservation projects and water supply facilities.

Those pieces of the Conference Board's index that suggest stronger growth included: a rise in money supply; an increase in the Standard & Poor's 500 stock index; higher building permits; an increase in weekly manufacturing hours; higher orders for consumer goods; and a wider spread between the yield on the 10-year Treasury note and the federal funds rate.

Components making a negative contribution to October's index included: a drop in orders for nondefense capital goods; higher weekly jobless claims, which signals expectations for slower economic growth; slower vendor deliveries; and a decrease in the University of Michigan's consumer expectations index.

"Following two months of generally flat numbers for the leading indicators, we are seeing some signs of economic growth being rekindled," said Michael Boldin, director of Business Cycle Research at the Conference Board.

"With interest rates falling and the stock market rising, the preliminary data for November is also positive, and we can expect a very healthy economy in 1999."